CER-ETH Research Seminar, Fall Term 2011

The CER-ETH Research Seminar takes place on Mondays during term time from 5:15 pm to 6:45 pm at ETH Zurich, Room ZUE G1 (Zürichbergstr. 18). Per term we invite 6 to 7 internationally known speakers to present and discuss their work.

Programme

Everyone who is interested is cordially invited!

If you would like to receive our weekly invitation via e-mail, or if you have any other question, please contact Jean-Philippe Nicolai

Speakers

Tianxi Wang

The paper examines the signaling role of bank finance and based on it, relates bank sizes to the asset risks and efficiency. It predicts that across banks of an economy, the bigger the bank, the lower the default risk of its assets, but across economies, the bigger the banking sector, the higher the default risks; and that so long as risk shifting problems are contained, the banking sector is not too big. Furthermore, the paper suggests that a universal payment cap upon the banking sector improve social efficiency. Lastly, it sheds new lights on the economies of financial intermediation.

DownloadFull Paper (PDF, 345 KB)

Ester Faia

We introduce banks, modeled as in Diamond and Rajan (2000; 2001), in a standard DSGE macromodel and study the transmission of monetary policy and its interplay with bank capital regulation when banks are exposed to runs. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements (as in Basel II) amplify the cycle and are welfare detrimental. Within a broad class of simple policy rules, the best combination includes mildly anticyclical capital ratios (as in Basel III) and a response of monetary policy to asset prices or bank leverage.

DownloadFull Paper (PDF, 979 KB)

Andrea Attar

A seller of a divisible good faces several identical buyers. The quality of the good may be low or high, and is the seller's private information. The seller has strictly convex preferences that satisfy a single-crossing condition. Buyers compete by posting menus of non-exclusive contracts, so that the seller can simultaneously and privately trade with several buyers. We provide a necessary and sufficient condition for the existence of a pure-strategy equilibrium. Aggregate equilibrium allocations are unique. Any traded contract must yield zero pro fit. If a quality is indeed traded, then it is traded efficiently. Depending on parameters, both qualities may be traded, or only one of them, or the market may break down to a no-trade equilibrium.

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Franz Wirl

We consider how one party can induce another party to join an international emission compact given private information. Due to multilateral externalities the principal uses her own emissions besides subsidies to incentivize the agent. This leads to a number of non-standard features: Optimal contracts can include a boundary part, which is not a copy of the no contract outcome. Compared to this, a contract can increase emissions of the principal for inefficient types, and reduce his payoff for efficient types. Subsidies can be constant or even decreasing and turn negative, i.e., the agent reduces emissions and pays the principal.

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Santiago Rubio

This paper examines international cooperation on technological development as an alternative to international cooperation on greenhouse gas emission reductions. It is assumed that when countries cooperate they coordinate their R&D investments so as to minimize the agreement costs of controlling emissions and that they also pool their R&D efforts so as to fully internalize the spillover effects of their investments in R&D. In order to analyze the scope of cooperation, an agreement formation game is solved in three stages. First, countries decide whether or not to sign the agreement. Then, in the second stage, signatories (playing together) and non-signatories (playing individually) select their investment in R&D. Finally, in the third stage, each country decides its level of emissions non-cooperatively. For linear environmental damages, our findings show that the grand coalition is the only self-enforcing IEA if marginal damages are sufficiently significant. This occurs because when all countries share their R&D investments, if one country leaves the agreement it must face larger abatement and investment costs because of the sharp reduction in its effective investment caused by the exit. The result is that countries lose the incentive to act as free-riders within the agreement. If marginal damages are not large enough, the grand coalition can still be stable provided that the scope of R&D spillovers is not very great. Finally, the model for quadratic environmental damages is solved, finding the main results of the paper are robust to this change in the specification of environmental damages.

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Katheline Schubert

International differences in fuel taxation are huge, and may be justified by different local negative externalities that taxes must correct, as well as by different preferences for public spending. In this context, should a worldwide unique carbon tax be added to these local taxes to correct the global warming externality? We address this question in a second best framework à la Ramsey, where public goods have to be financed through distortionary taxation and the cost of public funds has to be weighted against the utility of public goods. We show that when lump-sum transfers between countries are allowed for, the second best tax on the polluting good may be decomposed into three parts: one, country specific, dealing with the local negative externality, a second one, country specific, dealing with the cost of public funds, and a third one, global, dealing with the global externality and which can be interpreted as the carbon price. Our main contribution is to show that the uniqueness of the carbon price should still hold in this second best framework. Nevertheless, if lump-sum transfers between governments are impossible to implement, international differentiation of the carbon price is the only way to take care of equity concerns.

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Johannes Spinnewijn

Recent empirical work finds that surprisingly little variation in the demand for insurance is explained by heterogeneity in risks. The welfare and policy conclusions are substantially different when the residual demand variation is due to heterogeneity in risk perceptions and other noisy determinants rather than to heterogeneous preferences, as previously assumed. This heterogeneity induces a systematic difference between the revealed and actual value of insurance as a function of the insurance price, which is used to extend the sufficient statistics approach to the welfare analysis of adverse selection. The source of heterogeneity is essential for the effectiveness of insurance subsidies and mandates, information policies and risk-adjusted pricing.

DownloadFull Paper (PDF, 291 KB)